Big Tech Earnings Fears Drive Monday's Stock Market Sell-Off
Monday's rapid market decline highlights the significance of Big Tech earnings for the ongoing bull market and investor expectations for 2025.
Chinese AI Advancements Spark Rout
Developments from Chinese AI firm DeepSeek sparked investor concerns about heightened competition in the AI sector, particularly for Nvidia (NVDA) and other tech giants. This uncertainty led to a pause in US AI trading.
Big Tech Stocks Drop Sharply
Nvidia's stock plummeted over 16%, while Microsoft (MSFT), Alphabet (GOOGL,GOOG), and Tesla (TSLA) from the "Magnificent Seven" experienced declines of 2% or more. Broadcom (AVGO), a major player in AI, also dropped by over 16%.
Overreliance on Big Tech Earnings
Strategists have warned for over a year about the risk to the market from a slowdown in Big Tech's rapid earnings growth. With index valuations approaching multi-decade highs and 10 large-cap stocks comprising nearly 40% of the S&P 500, the rally in stocks is considered increasingly vulnerable.
Uncertainty Clouds Earnings Outlook
Unlike other risks such as interest rates or inflation, there has been no definitive reason to predict a decline in Big Tech's exceptional earnings growth. However, DeepSeek's new AI model has provided a tangible reason for investors to question whether high earnings expectations will be met.
"Magnificent Seven" Outperformance
In 2024, the Magnificent Seven earnings outpaced the rest of the S&P 500 index by 30 percentage points, according to Goldman Sachs. While this margin is expected to narrow in 2025, Big Tech earnings growth remains a crucial component of the bull market thesis.
Fundamentals Still Matter
Analysts believe Monday's sell-off underscores the importance of fundamentals in investment decisions. Other factors, such as tech's leading role in market returns, are likely to play a more significant role than geopolitical concerns in 2025.